5 Steps to avoid bad financial advice

Another day, another financial planning scandal.

It’s often noted that the quality of our political debates (and an honourable mention to partisan commentators and dog whistlers) is responsible for Australians losing faith in the political process and holding our politicians in such low esteem.

If the number and frequency of financial planning scandals continues at the same rate we’ve seen in the past few years, financial planners will soon make politicians look good in the eyes of consumers.

We’ve run a long campaign for a tightening of financial advice laws. The current government saw fit to lower the bar for financial planners, just as the Commonwealth Bank financial planning scandal broke, and a month or two before the latest concerns about the questionable behaviour and advice from some of Macquarie Group’s staff. And we weren’t alone — Choice, seniors groups, and almost every finance commentator decried the watering down of the rules. We’ll keep fighting.

Getting tighter financial advice rules is an incredibly important part of protecting consumers from dodgy, ill-informed and conflicted financial advice. But in lieu of better consumer protections (and even if those protections were tightened), here’s how you can protect yourself from getting poor advice:

1. Find out what you’re going to be charged

How is your planner going to charge you? By the hour? A fixed fee? A percentage of your assets? If it’s the former, make sure you agree before the hours start getting clocked up. If it’s the latter, complain long and loud. There should be no cost difference between two people with the same circumstances, whether you have $10,000 or $10 million to invest. Don’t let your planner get away with charging more just because you’ve saved and invested well.

2. Find out who owns the practice

If your financial planner works for a company that’s owned by one of the big banks or wealth managers (read: Commonwealth, ANZ, Westpac, NAB, Macquarie and AMP), be careful. Even if the planner isn’t being incentivised to sell you their owners’ products outright, do you know how the ‘approved product list’ was created, and what — if any — bias was involved?

3. Ask to see evidence of your planner’s track record

At The Motley Fool, every single stock recommendation — ever — is on full display, and is compared against the market return for the same period (and we’re beating it… thanks for asking). And we don’t even invest members’ money on their behalf. So shouldn’t your financial planner — who is going to invest your nest egg for you — have his or her track record up in lights in the foyer of the office? And if not, you have to wonder why.

4. Question your advice

You’re presumably using a financial planner because they have skills and experience that you lack. That’s completely appropriate — and many financial planners well and truly earn their pay. But whether you’ve been seeing a planner for years or this is your first visit, don’t leave until you understand exactly what they’re suggesting — and why. Ask why each investment was chosen, what the alternatives are, and why the chosen investment is better. Ask why your advisor recommends the particular insurance you’ve been offered — and what commission they’re receiving from it.

5. Keep score

According to Vanguard, $10,000 invested in the All Ordinaries in 1984 had become $278,000 by June 30 this year — a compound annual return of 11.7%. You may have a different investment profile — perhaps you want to hold more cash, property or overseas shares, and that’s fine. But whatever asset allocation you settle on, make sure you’re beating the benchmark in each case — and after fees — otherwise your advisor is costing you money.

Foolish takeaway

Quality financial planning advice can be vital when it comes to helping you structure your financial affairs properly. It can also be immensely helpful, if you don’t want to select your own investments. But both of those come with a significant caveat — your advisor must be giving you quality advice that ensures you’re better off than you otherwise would have been.

For many people, choosing their own investments can be both rewarding and enjoyable. But if you’re going to enlist a professional planner, using the list above will give you a better than average chance of finding one of the good ones — and adding meaningfully to your wealth.

Attention investors: You’re entitled to a free copy of my brand-new investing report, “The Motley Fool’s Top Dividend Stock for 2014-2015.” It comes complete with all the details on my favourite ASX dividend-paying stock. Click here to claim your free copy.

Scott Phillips is a Motley Fool investment advisor. You can follow Scott on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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